Many accounts and other assets are governed by beneficiary designations. Examples include life insurance, 401(k)s, IRAs, and annuities. These assets rely on contractual provisions with the financial institution to designate who receives the benefits upon the death of the owner.
Kiplinger’s recent article entitled “Beneficiary Designations – The Overlooked Minefield of Estate Planning” describes several mistakes that people make with beneficiary designations and some ideas on how to avoid problems for you and your family members.
Believing that Your Will is More Powerful Than It Really Is. Many people mistakenly think that their will takes precedence over a beneficiary designation form. This is not true. Your will controls the disposition of assets in your “probate” estate. However, the accounts with contractual beneficiary designations aren’t governed by your will because they pass outside of probate. That is why you need to review your beneficiary designations whenever you review your estate plan.
Allowing Accounts to Fall Through the Cracks. Inattention is another thing that can lead to unintended outcomes. A prior employer 401(k) account can be what is known as “orphaned,” which means that the account stays with the former employer and isn’t updated to reflect the account holder’s current situation. It’s not unusual to forget about an account you started at your first job and fail to update the primary beneficiary, which could be a former spouse.
Not Having a Contingency Plan. Another thing people don’t think about is that a beneficiary may predecease them. It is important to name a contingent or secondary beneficiary in the event the first beneficiary is not survivig.
Not Paying Attention to a Per Stirpes Election. If a person names several beneficiaries (such as children) as primary beneficiaries to share equally in the account or life insurance policy at the owner’s death, what happens if one of the beneficiaries is not surviving? Some beneficiary designation forms state that the deceased beneficiary’s share automatically goes to the other surviving beneficiaries. Other beneficiary designation forms give the owner the option to state that the deceased beneficiary’s share should pass to the deceased beneficiary’s children. This is known as a per stirpes election. Many times people are unaware as to which option they have chosen on the beneficiary designation form.
Naming a Minor or Incapacitated Person as a Beneficiary. If a minor or incapacitated person is named as beneficiary, unless the beneficiary designation form allows for the appointment of a custodian or trustee to accept the benefits on behalf of the minor or incapacitated person, a court-appointed guardian may be necessary for the minor or incapaciated person to receive the benefits. Also keep in mind that if an incapaciated person you’ve named as beneficiary is receiving government benefits, distributions from a retirement account, annuity, or life insurance policy, may jeopardize his or her eligiblity to receive the government benefits.
It’s smart to retain copies of all communications when updating beneficiary designations in hard copy or electronically. These copies of correspondence, website submissions and received confirmations from account administrators should be kept with your estate planning documents in a safe location.
Remember that you should review your estate plan and beneficiary designations every few years to make sure that they are coordinated and that they say what your really want.
You may also be interested in https://www.galliganmanning.com/trust-owned-life-insurance-in-your-estate-plan/.
Reference: Kiplinger (March 4, 2020) “Beneficiary Designations – The Overlooked Minefield of Estate Planning”